what does alpha and beta signify in portfolio analysis?

Answer 1

Beta represents hom much the average excess return of a stock will increase/decrease relative to the market. If the excess return of market increases by one percent, then stock with a beta of two should have an excess return (on average) of two percent.

Excess return is the return minus the return of the risk free bond (T-Bill).

Alpha is the expected return that is not related to the market.

In theory, the expected return on the stock should be"

Return = Alpha + RiskFree + Beta*(MarketReturn-RiskFree)

If markets were efficient, then Alpha should always be zero. If Alpha is positive, then it means one of two things:

1. This security is priced below its true value

or

2. This model of returns is flawed, and this security has risks that are priced into the security -- but unrelated to the market returns.

Beta is not a correlation coefficient -- but is related to it. It is equal to the covariance of returns with the market returns divided by the variance of the market. The covariance is equal to the correlation coefficient times the standard deviation of market returns times the standard deviation of the security returns (all are actually excess returns).

Answer 2

beta is the correlation coefficient btw your security/portfolio/fund and the SP500 index. [in the US]. Testing of past perfoormance is used to establish this.

briefly, if the future behaves like the past, a beta of 1.1 means that your item will go up or down 110% of the amount (percentage) the SP500 changes.

alpha is the constant in the best fit regression line determined in the analysis that estabilished the beta. I think that monthly data [monthend data] is used, so alpha is the monthly amount by which your item does better than the index, no matter whether the index is going up or down. positive alpha means consistently outperforms and negative means consistently underperforms.

***
researchers say that about 75% of the stock market moves in sympathy with the SP500 index. The other 25% of stocks can and do move any which way.

***
what beta does not tell you is how "good" the fit is. There is a world of difference between a 90% fit and a 60% fit -- especially at the level of individual stocks.

further, some issues have so little history that no realistic analysis is possible. betas are then estimated by the analyst community based on financial statement analysis. [and I have serious reservations about how good such analysis is, but that's another subject.]


does this help?

Answer 3

The beta is a measure of portfolio volatility relative to some index like the S&P 500. The alpha is a measure of portfolio net return, once the volatility has been smoothed or averaged out, compared to the index.

Is beta a measure of risk? Yes, to the extent that it can be very difficult to pick a short term buy price or sell price in a high volatility situation. But a beta number is a poor indicator of fundamental weaknesses in a company, which is the primary source of major risk.

Answer 4

Beta is the measure of the correlated volatility of an investment relative to the entire market, in simple terms, how the stock’s price moves relative to the overall market. Lower the value of beta lower the risk.
Alpha is a risk-adjusted measure of the so-called "excess return" on an investment than predicted by the Capital Asset Pricing Model which a fund manager achieves!
stock return = alpha + beta * index return.

Answer 5

BETA shows movement of share price with index if it is -ve its price 'll increase when market came down.
if it +ve it i'll incresa with mkt movement in proportion